"and the end of all our exploring will be to arrive where we started and know the place for the first time." Shantih.

Monday, August 1, 2016

The "Ease" and "Sophistication" of E-Money

Is the elimination of cash convenient for
exchange and a good idea? No. It is not. It is a very palpable loss of freedom. It is foolish because it is complicated and more subject to abuse and manipulation. We hear daily reports of hackers and credit data bases being compromised. We have Lifelock advertisements pitching us to protect our online identity. The digital payments world is a jungle that threatens your financial well being. Now in fact we actually make a lot of exchanges without actually using paper money and given the option of both e-money and standard currency can freely choose how to protect our wealth. By value I would surmise that 90% of transactions are done with checks or electronic payments. Perhaps measured by number of transactions more small transactions are done with cash.Cash normally completes the deal.When it changes hands, the contract is done.Cash is the paper note form of the legal tender. It is actually as necessary as gold WAS to an honest monetary system. What can it possibly mean for the government
to claim that the money cannot be touched or held but only
assigned to your electronic ledger as a number? "Dollars" become "numbers" that the Bank says you can spend in approved ways. How many ways can that "right to spend your own money" be limited?
Do you have money if you cannot use it? The variability and undefined
nature of money subjects the users to potential abuse.“Flexible” money is subject to
manipulation.Fixed money is subject to
shortages.

The whole
question of a “good” monetary system turns on the definition of money.Is money a thing or an idea?Money to be truly useful (and honest) needs a
specific definition.A vague idea is
certain to be misunderstood or manipulated.So despite money being a medium of exchange and store of value it is
also a unit of account which is the characteristic that requires a specific
definition.Quantities of abstract
things are nonsensical viz. how much do you love me?Our money, a dollar, is undefined. You are
paid in dollars that are undefined. You save in dollars that are undefined. But
a foot is this far.A pound weighs this much.That’s what a
“standard” is.This matters to me but
does not seem to be a major concern to most people.Essentially the approximate historical value
of a dollar is good enough for it to “work” for most people. I want to know who
gets to define it and what prevents them from re-defining it when it is
convenient or necessary. Who gets to say what a dollar is; you, your bank, or
the government?

I confess to being a hard money guy but let’s look at the
ease and convenience of electronic money. It is being touted as “better than cash”.So you work at a job to earn money and that
is Real.You have to put in the hours.
And what do you get for that?Chits that
allow you to buy things. When you are young your parents may have given you an
allowance that you either did chores for or were responsible for spending for
some defined needs to teach you budgeting, saving, and managing money. The
allowance was “conditional”, if you did what you were supposed to, you were
allowed to continue receiving it.If you
failed at managing it in some way, say by buying marijuana rather than clothes,
your allowance could be stopped.Your
ability to spend was controlled by your overseers (parents).

Electronic money is
somewhat similar to an allowance.Your
money is “yours” in a provisional sense, someone else (the bank) must agree
that you have it to spend.You can make
only certain kinds of transactions. Every
transaction is a banking act; Buying bubble gum, Paying a babysitter, selling used goods at a
garage sale, loans to friends. Every
transaction must be certified and approved to be you.The rules to prove that it is in fact you
require you to be dependent upon another party (your bank) agreeing that you
are you and have authority to spend your own money.Every transaction is almost like a credit
approval. “You” are the “credit score” or “ID proof” that is allowed to spend
the moneyin your account.A dollar is merely a unit of account number
in your bank account.You can spend
until your bank says you do not have any more.Do you have money or credit?Is
there any difference?

Frankly I have a problem with the complexity.Think about it.Every transaction needs the internet.To properly certify the transaction both
parties must have a computer.Each
computer must be connected in some way to a certifying bank.If either personal computer(or phone) is
down—if either bank computer is down –if
the internet is down or not available—the transaction cannot be accomplished. Let’s go further,what if the power is off? Do you have money?

If the authorities were to eliminate cash for our ease of
use, then what exactly “is” a dollar? “Numbers” in an account.A dollar, just a floating
idea of what everybody thinks it is.Its
value is what the two parties engaged in exchange agree that it is. This value
may or may not remain constant and so makes it difficult to consider it a store
of value.When you have a Rewards
account with an airline or credit card the ‘rewards’ can be adjusted by
requiring more ‘digits’ for a flight or can be phased out by a particular
date.This complicates the idea of
“saving” since it is not clear what the future value could be.Can the government produce all the dollars it
wants with a magic Aladdin’s lamp?Then they
are not bound by the numbers they have in their accounts.If they want something—they rub the lamp(push
a digital button to put more numbers in theiraccount).I haveto work, they rub the lamp. Taxes are not
necessary if the government can produce all the money it needs or wants. Stupid me, I work--the government (through a fair and impartial system) puts money in its own account. Then it can give it to whoever it wants! Some
might consider there is a fairness issue here.I consider a system like that-Unjust.

E-money is completely dependent upon a functioning
electricity grid and the internet.All
transactions then become embedded in a web of contract law that makes them
provisional.All transactions take place
over time rather than settle with an exchange at a particular point in time. In
short, when exactly do you buy something?When you hand over the cash, the item is yours.With e-money, ALL transactions are
“reviewable” for their appropriateness. They become “approved” transactions that
happen over a period of time.They enter
a legal world.Let me give an
example.Several years ago, as a
dentist, I had a new patient who required a small surgical procedure.He had insurance that we checked and it paid
80% of the cost.The remainder was the
patient’s responsibility.So on the day
of service we did the procedure the patient paid his 20% and 3 weeks later the
insurance company sent us the balance due of the fee.Transaction done.One year later I received a nice note from
Blue Cross that they had recently done an audit of their accounts and realized
they had inadvertently provided coverage to patients who in fact did not have
coverage.My patient did not have
coverage when we provided the service and so they were billing us for the
payment they had made.Wait a minute I
protested—you said he had coverage you can’t expect me to pay you back?Well yes they did and they had a means of
enforcing it.I have other patients with
Blue Cross coverage and they would deduct what I owe from those payments.They would “pay” Mrs. Smith’s claim that they owed me and apply
it to the balance I owed.Sweet(for them).They said I could collect from the former
patient.Right.Money thus enters this nether world of
contract law.

For 40 years I have been aware that I have a “battery”
problem.I don’t mean I beat my
wife.I mean when I am ready to use some
device or machine, the battery is dead.I jump in my car, the battery is dead (or stolen).I want to take a cute video of my son.I haven’t used the camcorder in a month,
dead. I forget to charge my phone overnight, the next day I am on fumes.It winks out.How do I buy lunch when my phone is dead?Go to plan B.Credit card.Debit card.Suppose there are transaction fees or limits
or I forgot my card.Do I go
hungry?E-money becomes inconvenient.

What about Simplicity?Suppose I would like to buy a donut from a street vendor?He takes Apple-Pay and I don’t have the
app.I suppose the critic would say the
seller should be savvy about all the ways a customer could pay but he may be
charged for it and not want to.Once
encumbered in this manner, the fees begin to mount.With no cash a seamless web of payments would
be nicked for fees all along the payment scale just as now an ATM visit dings
the holder for $2-$4.

The government considers itself responsible for producing
the legal tender. It is illegal to
transact in any other private money.(That is a separate rant and one that would entail a large change too)The
reason is obvious—a purchase entails taxes and a payment for labor especially creates
“obligations”(worker’s comp) and taxes
as well. If you transact privately, government has missed a tax
opportunity.It considers this
illegal.Every exchange has a transaction cost
associated with it.With a cash payment
this responsibility is hidden.E-money
makes it easier to ensure the authorities are paid their required fees and it
creates the possibility of transactional costs added by the facilitators of the
exchange—banks, credit card companies, etc.With e-money—money only exists in banks.It can be exchanged but it cannot be removed from the system.You are not allowed to take your own ball and
go home.

It seems to me that E-money will necessitate a black market currency.I guess it is possible to buy heroin with a
bank card if you call it something else (I myself don’t know) but people would
necessarily be unwilling to do black market transactions with the legal
currency.So two currencies would likely
develop—undercutting the usefulness of e-money.

Cash is the
paper note form of our money the dollar.It is a shared social idea of value.We all agree it has some rough value in exchange for any other
good.It’s “worth” 1/100th of
a shoe or an apple or 7 inches of copper pennies.It itself is not defined.It used to be defined as so many grams of
silver—specifically 371 g of silver but gradually that definition has
disappeared.When dollar redemption for
gold in 1933 was suspended domestically and then internationally in 1971, the
dollar became “an idea” of value.Who
decides what a dollar is worth?We all
do by our acceptance of it.Where do
dollars come from?Most of us know the answer to that question; the Federal Reserve, banks, and people based upon the power to do
so.I create dollars when I charge
shopping purchases and banks create dollars when they make loans.The central bank makes dollars when it
credits dollars and accepts “assets”.There is no limit to the number of dollars that can be created.I find this paradoxical.There is a fixed amount of fresh air, clean
water, land, and resources and they are essential to life but they have a dollar value while a dollar that is imaginary can be created in unlimited quantities.Curious.

So for 45
years we have had a currency unit that is not defined.This could be considered unusual especially
since a number of very important decisions are based on what value it has.Everybody cares how much they get paid.Most people consider saving money to be a
good thing but it does not make sense if in the future it may have a different
(lower) value.If money is a social
construct, it is not entirely “yours”.If someone else can decide what YOUR money is worth—could we not argue
that its value is suspect?So I am not
comfortable that money is simply a practical social idea used for exchange
managed by government for the good of all. What are the dangers of this
definition?Danger #1 is changing the
definition.Danger #2 is producing too
little or too much of it.How much IS
enough?Danger #3 is its relative social
importance.Is having money more
important than being honest?I do not
mean they are mutually exclusive –why not both- but its centrality to exchange
in a complex society gives it a fundamental value similar to health.How much health is enough?Personally I want a fairly high standard for
what is ‘healthy’. I also want a high standard of value.If I am sick how much does health cost?What is it worth?Like the pearl of great price, everything I
have.In short to live in this society I
have to care about money.As someone
once said about war—you might not be interested in war but war is interested in
you.You might not be interested in
money but others are interested in your money.If you have “no money” it could be said that your participation in our
current civilization is marginal.Money
defines what you can do and so defines you.If you don’t accept the label there may be a LOT you cannot do.So go ahead and "drop-out" become a hunter-gatherer or self sufficient farmer. Join a gift economy. The rest of us will talk
about cash.

For years I
have heard money managers talk about stocks bonds and cash.As in, the market is getting over-valued and
it is time to “go to cash”. Inconceivable.I don’t think they mean what I mean when they use that word.Cash means dollar bills in your mattress,
wall safe, or wallet not money market funds, short term treasuries or bank
CD’s.Cash is federal reserve paper
notes.Going to cash in an investment
account to my way of thinking is not possible.You can go to money instruments but you do not hold cash in a Schwab or
Vanguard account.You do not have “cash”
in the bank.Everybody knows you have
loaned the bank your money and the bank has loaned it out.We’ve all watched Jimmy Stewart in It’s a
Wonderful Life and there is some cash in the vault but it is not “yours”.

Having
physical cash is a check upon the unlimited power of a bank to create loans and
therefore money.A monetary system
without cash is one more remove from a defined unit of exchange.A dollar reserve note is not redeemable for
anything but another note BUT digital money is NOT even in your
possession.You own the right to the
money but it is not “yours”. It is a social construct that can be re-defined by
someone else. A subtle but very
important difference.

So let me
make one more point about the “ease” of electronic money.Let’s envision a system similar to an EZ Pay
toll app that simply deducts numbers from your account as you go about your
daily affairs;picking up a magazine,
buying a coke, getting lunch, it all just comes automatically out of your
account as you do things.Money goes
into your account from however you earn it and it goes out as you do
stuff.This is easy.Is it desirable? Where is your say so in what comes out of your
account?Could you be charged for
breathing valuable air?What if they make the sidewalk downtown a toll
road?What if the price of things
changes randomly so called “peak hour pricing” for certain goods or
activities?The algorithm is determining
what goes into or out of your account.You
have the “freedom” to monitor it carefully or simply pay whatever is expected
of you.I am looking in vain for the
freedom that would attend a system like this.I see it as a lure to drain whatever numbers(money) you have into the reservoirs
of the mega-rich and put you on a treadmill of debt.I do not consider e-money an improvement to
our current system which is itself seriously flawed. As I said, I tend to be a
hard money advocate, preferring fixed money to flexible money. The big problem
with defined money is the amount that goes into “hoards”.If savings can be freed up to flow into other
uses, then we have discovered the system that will permit the maximum amount of
freedom for each and every one of us. The essential problem is that we need a "tether" of value otherwise the rules of the game can be changed capriciously to some (or everyone's) detriment. So let us ask, if we eliminate cash, Cui buono? You? because you don't have to soil your greasy hands with it or someone else who can create what they need and siphon off what you have. And if all else fails and they need it, well they can just take it. Pass a law that what is yours is now mine. So call your Congressman--who is paying him?